Actionable Ideas for Companies and Sponsors

Megatrend in Non-Tech Companies Acquiring Tech Companies

While technology companies have been disrupting traditional markets for many years, the pace of this disruption has increased in recent years. No industry has been immune to the wave of innovation emanating from the technology sector. Management teams and Boards have begun to react aggressively to this trend, through acquiring the very technology companies that have been encroaching on their markets to help them maintain their leadership position through this evolution of their industry. In fact, for the first time ever, over 50% of technology companies acquired in 2016 were purchased by acquirers outside of the technology industry. Five years ago, a then-record-breaking $20 billion of technology companies were acquired by non-tech companies. Last year, that number was more than $125 billion.

The key drivers of this megatrend include:

  1. Survival: Boards and management teams have seen the destruction created by companies such as Amazon, and don’t want to risk becoming irrelevant. Furthermore, leading companies in every industry have come to a realization that building new technologies and business models in-house is a painstaking process prone to many mistakes
  2. Pervasiveness: Technology has permeated the daily lives of almost every consumer, bringing awareness as well as confidence to traditional companies evolving to technology-first approaches
  3. Change: Technology has allowed for the creation of new business models (customer acquisition, pricing, distribution), which non-technology companies are not able to capitalize on. Furthermore, many technology companies have built a culture around not just innovation, but the rapid ideation and testing that leads to quicker product evolution and time to market
  4. Growth: Traditional companies have become more comfortable with growth-based valuation models and understand the need to pay acquisition multiples which are meaningfully higher than their own multiple

Jefferies has been at the forefront of this trend, and also has developed valuation analysis tools to help traditional acquirors better understand how to value high growth-based acquisitions as well as the pro forma impact of such acquisitions on a company’s overall valuation.